Fund Watch - Q4 2018

Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world.

Risk Disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

Fund Watch uses our team’s process to highlight the past quarter’s developments in the fund world. It is fact-based and uses performance analysis which forms part of our investment process. All data is from Lipper for Investment Association (IA) sectors and is calculated in total return terms in sterling for periods ending 31 December 2018.

This quarter’s report includes the following analysis:

  • The BMO MM Consistency Ratio – highlighting the surprisingly limited number of funds beating their peers on a regular basis
  • Tops and Bottoms – the ultimate winners and losers over the quarter
  • Sector Skews – the best and worst of the 37 IA sector averages
  • Risky Business – a look at the leading funds for combining first class longer-term returns with the lowest levels of volatility

 

The BMO MM Consistency Ratio

Here we conduct a review of the 12 major market sectors, filtering out only those funds that are consistently above average in each of the last three 12-month periods, and those consistently top quartile. In the 12 main sectors researched, there are currently 1,108 funds with a three-year track record.

Risk Disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

  • The BMO MM Consistency Ratio for top quartile returns over three years (to the end of Q4 2018) fell significantly to 0.54% (1.69% last time) with only an incredible 6 of the 1,108 funds achieving this feat. This ratio was well below the usual historic range of c.2-5%.
  • The IA UK Smaller Companies sector was the most consistent for top quartile returns with 6.52% of funds making the cut. It was followed by the IA Global Bond and IA Strategic Bond sectors, which both had 1.6% of funds making the grade respectively. Both these sectors and the IA Europe ex UK sector had only 1 fund that was consistently top quartile however, with a remarkable 8 of the 12 sectors failing to have any consistently top quartile funds over the period.
  • Lowering the hurdle rate to simply above median in each of the last three 12-month periods saw 120 of the 1,108 funds delivering above median returns consistently. This means this less demanding ratio fell to 10.8% from 14.4% in Q4.
  • All 12 main IA sectors had funds meeting the less demanding above median consistency hurdle. The most consistent sector on this measure was the IA UK Smaller Companies sector with 21.7% of funds performing above median for 3 consecutive years. The IA UK All Companies and IA North American sectors were the next best with 13.5% and 11.4% respectively achieving the target. The IA Japan sector was the least consistent, followed by the IA Asia Pacific ex Japan sector with 4.1% and 5.9% of funds achieving consistency respectively.

 

BMO MM comment

Wow. This was truly a challenging quarter for active management as the vicious rotation in markets and asset prices created a torrid environment for investment. With a massive risk off rush in December profit taking in the growth darlings was replaced by the need for safety and the perceived security of Government bonds and staple equity sectors where earnings are unlikely to disappoint, regardless of price. With the ECB now firmly stating their withdrawal from supporting the market at a time when the US Federal Reserve is doing the same, natural market forces should come into play, and with that a more fruitful time for active management.
 

Tops and bottoms

Identifying the best and worst performers of all funds in the quarter across all 36 IA sectors.

Use our handy glossary to look up any technical jargon you are unfamiliar with.

Related capability

Multi-Manager

The £205m Investec Global Gold fund run by George Cheveley was the strongest performer in the IA universe in the fourth quarter of 2018. With a skew to gold mining companies, the fund benefited from both market and stock specific moves

Worthy of note is the results from Q3 where the worst performing fund lost 43% of its value. This highlights the rotational nature of the market over these two quarters.

The £43m Allianz UK Mid Cap fund run by Andrew Hall and Matthew Neville – was the worst performer of the IA peer group in the fourth quarter. With a focus on the challenged mid-cap space in the UK the skew to Industrials and Consumer names cost the fund even relative to its benchmark the FTSE mid250 which fell 13.5% in the quarter.
 

Sector skews

Identifying the best and worst performers in the quarter across all 37 IA sectors.

The fourth quarter of 2018 saw a change of direction from the previous quarters with most IA sectors in negative territory.

A change of rhetoric from the Federal Reserve following their latest rate hike served to highten already nervous sentiment and create a bolt for profit taking and safe assets, particularly in the final month of the year.

The IA UK Index Linked Gilt was the best performing sector gaining 2%, with the IA UK Gilt sector next best rising 1.6%. On the flipside the IA North American Smaller Companies sector was the laggard returning -17.7% with the IA Japanese Smaller Companies sector the next worst falling 17.1%.

The IA UK Equity Income sector was the strongest performer of the UK equity sectors falling 10.9% with the IA UK All Companies sector next best falling 12.5%. The IA UK Smaller Companies sector was at the back of the pack losing 15.9%.

The IA UK Index Linked Gilt sector led in the UK bond space rising 2%, with the IA UK Gilt sector next best gaining 1.6%. The IA £ Corporate Bond sector lost 0.5% in comparison, The IA £ High Yield sector was the worst of the UK bond sectors falling 4%, with the IA £ Strategic Bond sector by comparison falling 1.3%. The IA Global Bond sector sat in the middle of somewhat gaining 0.3% in the quarter.

The IA Targeted Absolute Return sector failed to live up to its name, falling 2.3% in the quarter. The 12-month return for the sector remains a very disappointing -2.7%.

Looking at the Mixed Asset IA sectors, the exposure to equity dictated the ranking of the sectors with the IA Mixed Investment 0-35% Shares sector leading the pack falling 3.1%. The IA Mixed Investment 20-60% Shares sector was the next best falling 5.5% with the IA Mixed Investment 40-85% Shares the laggard falling 8%.

The IA Global Equity sector fell 11.6% against a fall of 8.8% for the IA Global Equity Income sector as the defensive qualities of Income assets helped a little in nervous conditions.
 

Currencies

The continued saga around Brexit and last-minute delay to the House of Commons vote served to only weaken sterling at a time of heightened tension in global markets. With the US dollar also compromised as concern grew over the trajectory of the economic path States side, the Yen again became the go-to defensive play in the quarter.

Risky business

Can you have your cake and eat it? Here we search for funds with good risk characteristics and establish which funds offer the holy grail of low risk and high returns. For this purpose, a longer time period is required, so we look back over three years to the end of the quarter.

Measured to the end of Q4 2018, yet again no fund achieved the perfect mix of top of the sector 3-year returns with bottom of the sector 3-year volatility. Worthy of mention is the Lazard MENA Fund which achieved 4th percentile returns and 99th percentile risk.
 

Summary

In summary, we believe the performance numbers are – as always – well worth crunching to find trends, provide ideas, layer knowledge on how each fund performs and to generally provoke thought.

Of course, the analysis must be taken in context, and the qualitative work must be done to allow for fully informed judgments. We hope you found this review interesting, and if you have any questions, contact us.

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